Saturday, 14 February 2015

MoD finds Pilatus' demands for additional money for "follow on support" not in line with original bid

By Ajai Shukla

Business Standard, 14th Feb 2015

The purchase of seventy-five trainer aircraft from Swiss
company Pilatus was fundamentally flawed, a key defence ministry official has discovered.

In a detailed note that the official has requested be
“brought to the notice of RM (Raksha Mantri, or Defence Minister Manohar
Parrikar)”, he shows that additional money being demanded by Pilatus, over and
above the contracted price of Swiss Franc (CHF) 557 million (Rs 3,870 crore),
makes the PC-7 Mark II trainer far more expensive than was assessed while
awarding Pilatus the contract.

Business Standard has reviewed the six-page note. This
suggests that Pilatus was not the lowest bidder (L1) and was awarded the
contract incorrectly.

Contacted for comments, Pilatus cited “confidentiality
agreements with both the GOI [government of India] and HAL.” The MoD has not
responded to an emailed request for comments.

The Pilatus contract has been in the news from the start. On
May 16, 2011, when the ministry of defence (MoD) opened the commercial bids for
75 basic trainers, Pilatus’ closest rival, Korea Aerospace Industries, strongly
protested that Pilatus had submitted an incomplete bid and should be
disqualified. South Korea’s defence minister personally wrote to his Indian
counterpart, AK Antony, requesting a “high-level review”. Overruling these
objections, the MoD awarded Pilatus the contract.

Now the note dated January 9, 2015 and signed by AR Sule,
the ministry’s “Finance Manager (Air)”, who handles the financial aspects of military
aircraft purchases, shows that the Korean protest was valid.

This was the first MoD tender decided on the basis of “life
cycle cost” (LCC). It instructed all vendors to specify the costs of buying,
maintaining and flying their respective aircraft over a 30-year service life. The
winner --- termed the “L1 vendor” --- would be the company whose trainer had the
lowest LCC.

The actual LCC of the PC-7 Mark II is significantly higher
than Pilatus’ commercial bid; it now emerges from detailed calculations in the MoD
note.

“The actual Life Cycle Cost could be much higher than the
one used for L1 evaluation and may invite audit objections subsequently”, the
note observes.

According to the MoD official’s noting, Pilatus was declared
L1 vendor based on its declared LCC of Rs 4,160 crore. With the exchange rate at
that time being 1 CHF = Rs 51.95, Pilatus’ cost breakdown (see graphic) was: CHF
557.39 million (Rs 2,896 crore) as the “direct cost of acquisition”, or
purchase price; CHF 36.44 million (Rs 189 crore) for spare parts; Rs 5.5 crore
for servicing and maintenance; CHF 114.36 million (Rs 594 crore) for
depot-level overhaul; and Rs 476 crore as operating costs over its 30-year service
life.

Serial No

Item

Cost (in million
CHF)

Cost (in Rs
crore)

a

Direct acquisition cost of aircraft, equipment, systems
and services

557.39

2,896

b

Cost of spares and reserves

36.44

189

c

Cost of scheduled servicing

-

5

d

Cost of depot overhaul

114.36

594

e

Operating cost

-

476

f

Total cost of
acquisition (TCA)

4,160

(Source: defence
ministry noting, dated January 9, 2015)

These figures, however, have been rendered invalid by Pilatus’
demand for more money. The MoD note states the Indian Air Force (IAF) has moved
a proposal for Pilatus to be paid CHF 72.95 million (Rs 507 crore @ current
exchange rate of CHF 1 = Rs 69.50) for a “Follow On Support Contract” (FOSC) to
cover repair and maintenance over the five years that follow the initial two-year
warranty period.

“This is almost three times of repairs and maintenance cost
presumed at the time of L1 evaluation”, points out the MoD note. It complains
there is no way to enforce a price on the vendor.

The calculation in the note are as follows: in Pilatus’
commercial bid, the cost of repair and maintenance over the PC-7 Mark II’s
30-year service life adds up to CHF 150.80 million (36.44 million + 114.36
million). Therefore, the cost over 5 years should work out to CHF 25.13
million, i.e. one-sixth of the 30-year figure.

However, going by Pilatus’ FOSC demand, the aircraft’s LCC
would be consumed in less than a decade, even in constant 2012 prices. The MoD
note observes: “88.89% of TCA [total cost of acquisition] (excluding operating
cost) will be incurred at the end of 07 years period (02 years warranty + 05
years of FOSC) as against Rs 3,684 crore for lifetime evaluation arrived at the
time of L1 evaluation.”

The MoD official also notes that numerous other expenses that
Pilatus has now demanded in the FOSC --- such as supply chain administration,
publication updates, etc --- “were not factored into TCA (total cost of
acquisition).”

The note also observes, “There is no independent validation
of information provided by the vendor to validate the claims made by them for
TCA…”

“It thus defeats the basic objective of LCC”, he notes.

With about 55 aircraft already delivered by Pilatus, the
contract for 75 aircraft can hardly be cancelled. But the defence minister will
find it difficult to okay the IAF’s proposal to buy more 106 PC-7 Mark II
trainers.

With the LCC model being seriously questioned, Pilatus is
not the only major contract in the firing line. A similar model was followed to
declare Dassault the lowest bidder in the proposed $18-20 billion purchase of
126 medium multi-role combat aircraft (MMRCA).

The MoD official has this in mind when he writes that “the
issue may be brought to the notice of the RM (Raksha Mantri) as two high value
cases of IAF based on LCC model are at CFA (competent financial authority)
approval stage.”

13 comments:

Anonymous
said...

Our babudom is paid salaries to find solutions not ask questions that 5 years late.. Since this Guys was stepping wpfor so long, take the amount from salary.Time we need to refo what George did send all these buffoons to the front.

As far as Defence acquisitions are concerned, first comes the functional requirements, and generally, in cases where safety of personnel is involved, such as the case of aircrafts, the safety requirements also take priority. I have seen it first hand, the vendors (DPSU incl), the MoD Babus are often not bothered about these aspects, as neither their comfort, nor personal safety is on the block. Hence, L1 models will not always work, and such line of retrospective analysis is often to derail ongoing projects for petty gains, or in revenge for not getting the contract. If it was a wrong costing model, why was it allowed to go through?

You are stuck to Pilatus like a broken radio. Get over it. French Rafales are going to drink all your milk-shake and you are still stuck with Swiss.

If no Pilatus, how will our officers of Imported Air Force go to visit Swiss Alps? Who will pay for the trip and boarding? They also have desires which need fulfillment. Similarly, if no Rafale, how will they go to South France? They will miss the vineyards. Its simple mathematics which you choose to ignore.

Drop this topic now like you did with appointment of Chief of Joint Staffs. NO point flagging a dead or pretending to be dead horse. Every one knows that India's Air Force is a bloody joke. Even that joke is imported. So, Get to some new topic.

At least trainee pilots can train on the pilatus without stress and tension. We know how inefficient Dhruv are falling to the ground. Kaveri engine failure. Nothing for HAL to gloat. Leave the poor trainees alone.

Dear Sir,Your article is well written and points out the ambiguity in our procurement system. A ploy being used effectively used by the French company DCNS which has been milking the Indian MOD and Navy since years now. Every 1 - 2 years when they feel the need to pay salaries to their staff, they come to MOD and raise the invoice for providing additional support service for the scorpene contract. The scorpene contract for which they have already been paid over INR 24,000 crores !!!!!! The Indian government is still paying the french morons even till now. And to top it all when the scorpene will actually be ready they would be without any Teeth to bite, as they would be inducted without the HWT (confirmed by Business standard old reports) while the french keep charging for work they have already been paid.

The problem is INDIAN MINDSET and I hope the Modi government wakes up soon enough to realize that just making in India won't be the end of corruption. It may raise bigger concerns of inferior quality products and even more cheap corruption (we Indians are no saints)

Mr.,Kind regards on an article which ought to spruce up your 'investigative' 'hard hitting' journalism cred. I sincerely hope you might go someplace with that. But, the ground reality is that HAL sucks balls. Big time. Now, you're telling/reporting, that india must buy two types of light trainers, one of which is on the drawing board, and built by a company which cannot, for once, deliver a standard product, leave alone one time? Notwithstanding alleged corruption, higher expense and general smugness of the swiss, the aircraft that we have right now, flies. Bird in hand, however expensive, is worth more than two in the bush. So i cant comprehend what exactly can be achieved by unravelling this, other than boosting up your cred. Please suggest some alternatives, or roll some body's head. Otherwise, digging old graves wont make you any younger, old chap.Not getting personal, but really expecting a reply.Jonathan Rogers.

I think its time india should hire proffessional negotiators to check each terms and conditions very carefully before inking any deal.these foreign firm taking unfair benefits of our so called knowledgeble babus stupidity .they must be fined hard if they dont oblige the original contract then.

Sir We told this repeatedly to the DCAS and D Plans four years back and we were thrown out of Air Force. Our LCC and PBL models are the worst model ever drafted by crooks who wanted to satisfy the Tyagi / Browne combo. You read the horrors of the MMRCA specs in the RFP. All deliberately skewed to Rafale. When will this drama stop.